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Frontier Communications Loses Money, Residential Subscribers in Q4

Q4 and even 2015 is really only a prelude to the company completing a major acquisition from Verizon in 2016.

Frontier Communications (NASDAQ:FTR) ended the year with slightly less customers than it opened 2015 with.

That's somewhat disappointing for a company which operates in the pay-television and broadband space where most of its competitors have managed to grow their overall subscriber bases. Companies including Comcast and Time Warner Cable managed to mitigate slight full-year losses in cable customers by growing their broadband subscriber base.

Frontier failed to do that though it did gain broadband subscribers in both Q4 and for the full year, but the gains did not make up for its losses in video and business customers. The drops were not substantial, but they may be a cause for concern for a company which is about to add a huge influx of subscribers as it completes a transaction to buy Verizon's (NYSE:VZ) wireline operation in California, Florida, and Texas, for $10.54 billion in cash.

CEO Dan McCarthy put a positive spin on the results in the company's Q4 earnings release.

McCarthy Source: Frontier

"For Frontier, 2015 represented a year of substantial accomplishments in ongoing operations, the successful integration of the State of Connecticut, including delivering synergies in excess of our targets, and the preparation for the acquisition of the Verizon California, Texas, and Florida properties," he said.

A look at the numbersWith Frontier being on a massive growth tear, its quarter by quarter profitability does not really matter in the long run. During Q4 revenue was just over $1.4 billion, a drop of about 1% from the previous quarter. The company lost money, $103 million or $0.09 per share, but if you exclude an acquisition related interest expense of $178 million, acquisition and integration costs of $86 million, and certain tax items of $7 million, non-GAAP adjusted net income was $56 million, or $0.05 per share.

More troubling for the growing company is that it saw a 0.7% drop in its residential customer base in the quarter. Frontier also lost 1.7% of its business customer base. On the positive side the company did add 102,000 net broadband customers for the full year while losing 38,000 cable customers.

Overall, when you look at people who remained customers, signed up new, or left altogether Frontier dropped its overall user base very slightly quarter over quarter and went from 3.51 million paying users at the end of 2014 to 3.41 million at the end of 2015. The company did manage to grow average revenue per residential customer from $61.11 to $63.93 for the full year and its average revenue per business customer from $661.15 to $690.88.

Essentially the subscriber loss is a little bit troubling but the ARPU gains are encouraging.

It's all about the futureIn reality Frontier operated in a holding pattern during 2015 as it worked toward gaining the regulatory approvals it needed to complete the Verizon deal. Those permissions have been granted which clears the way for the company to more than double in size adding 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million video connections, according to a press release.

McCarthy expressed big hopes for the Verizon properties in his earnings release remarks.

"This transformative acquisition will expand Frontier's operations into new markets with leading-edge capabilities, increase our economies of scale, and improve our competitive position," he said. "We have increased our Day One synergy estimate and are continuing to refine our target cost structure."

The deal is expected to close on April 1.

Integration is keyFrontier essentially had a dry run for how it will integrate the Verizon properties when it added its Connecticut territory in 2014. That was a bumpy road with high levels of customer complaints to state regulatory agencies early which the company did smooth out fairly quickly.

If you assume that Frontier learned its lesson from its problems in Connecticut, it's reasonable to think that integrating the Verizon customers will be a smoother process. The challenge for the company is keeping pace with its rivals and not seeing the slow attrition of its customer base which its 2015 numbers suggest.

There was nothing in Frontier's Q4 or 2015 numbers which was shockingly different from any of its rivals, but the user trend was a slight negative. Going forward that's worth watching especially because unlike many cable/Internet companies Frontier only operates in competitive markets. If it executes it can hold onto or even add customers while growing ARPU. If it stumbles -- especially with its new former Verizon users -- then the negative user growth trends could accelerate.

Daniel Kline has no position in any stocks mentioned. He is a Frontier customer in Connecticut who accidentally erased two shows he wanted to watch from his DVR. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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